The External Ties of Top Executives: Implications for Strategic Choice and Performance

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The ability of executives to formulate and implement strategic initiatives that capitalize on environmental opportunities, while mitigating external threats, is vital to organizational success. The factors that affect strategic choice are therefore of central concern, and a large body of work has explored the determinants and processes of strategic decision making, with particular attention paid to the role of senior executives and top management teams in shaping organizational outcomes. Building largely on the conceptual arguments of Cyert and March (1963), Child (1972), and Hambrick and Mason (1984), researchers have found considerable empirical support for the view that organizational profiles reflect the characteristics and processes of senior management.

While prior studies have provided important insights, an understanding of the executive-level factors affecting strategic choice nevertheless remains limited. Empirical research on strategic choice and upper echelons has tended to focus on factors endogenous to the firm's senior executives (i.e., their backgrounds and personal characteristics) (e.g., Bantel and Jackson, 1989) and the social processes within top management teams (e.g., Eisenhardt and Schoonhoven, 1990). Yet research on executives, dating back to early studies, suggests that senior managers operate in a social context that spans organizational boundaries (e.g., Barnard, 1938) and that perhaps up to 50 percent of all executive time and effort is spent in boundary-spanning interaction (Mintzberg, 1973). Executives' boundary spanning activities and their associated interactions with external entities are of consequence to organizational outcomes. Study suggests that they are critical to executive effectiveness along numerous dimensions, including strategy formulation and implementation (Kotter, 1982). Yet despite the known importance of executives' boundary spanning ties on firm-level outcomes of strategy and performance, surprisingly little research has focused on these important links.

The purpose of our study is to address this oversight. We draw on complementary literatures to develop and test the idea that strategic choices are affected by the external ties of top management team members and that the informational and social influences arising from external interactions will be reflected in strategic profiles, particularly the degree to which the firm's strategy conforms to or deviates from central tendencies in an industry. We propose that an improved understanding of strategic choice can be gained by examining the effects of the executive team's external lies on organizational strategy and performance. Further, by examining the effects of a diverse set of external ties -- directorship ties, as well as other boundary spanning relations assumed by senior executives -- we extend understanding of the implications of several interorganizational relations maintained by top executives.

THEORY AND HYPOTHESES

As first elaborated by the Carnegie School (e.g., Cyert and March, 1963), top executives tend to make strategic choices under conditions of information overload and ambiguity. Apart from the inherent complexity of the decision-making process -- monitoring of external contingencies, interpreting their significance to the firm, formulating viable strategic alternatives, and finally selecting an appropriate course of action -- factors such as changing environments, conflicting informational cues, and competing goals and expectations tax the cognitive limitations of strategic decision makers (March and Simon, 1958; Cyert and March, 1963). Accordingly, strategic decisions are the result of behavioral factors rather than the result of techno-economic, rational optimization. Decision makers selectively perceive only a limited number of available cues (Simon, 1955) and adopt simplified models of reality (March and Simon, 1958; Finkelstein and Hambrick, 1996) shaped largely by their prior knowledge and experience. Additionally, strategic decision makers economize on search and choice processes, relying on established channels to acquire information and on external referents for insight into plausible alternatives (Cyert and March, 1963).

The logic of the Carnegie School served as the main foundation for Hambrick and Mason's (1984) upper echelons model of the relationships between top executives' characteristics and organizational outcomes. Both the Carnegie School and upper echelons research have been notably silent, however, on the influence of external referents and contacts on strategic choices. The promise of such a perspective is suggested by several literatures in which external ties are seen as important conduits for informational and social influences on executive decision making.

External Ties: Informational Influences on Strategic Choice

Executives' interactions with external entities provide access to several types of informational cues. Two themes particularly germane to strategic choice recur in the literature. They suggest that executives' external ties serve as conduits for information that shapes managerial views of the environment and contributes to the set of alternatives from which jstrategic choices are made.

Shaping managerial views of the environment. Among the most critical functions of boundary spanning activity and the interaction it accords is the acquisition of environmental information (e.g., Mintzberg, 1973). Through their interaction with outside entities, executives derive important insight into their external context. While documentary media also convey information about environmental changes and trends, research into environmental scanning suggests that executives greatly prefer information from personal contacts (Aguilar, 1967). Contributing to this preference are several advantages personal transmissions offer over documentary media, including timeliness, richness, and the circumvention of intraorganizational biases (e.g., O'Reilly, 1983; Daft and Lengel, 1984).

The influence of external contacts extends beyond information acquisition, however, to affect interpretation as well. Under conditions of bounded rationality, decision makers look to their counterparts in an effort to draw meaning from the numerous and often ambiguous cues drawing their attention (Festinger, 1950, 1954). They construct a logic for their own immediate contexts by relying on the experiences, definitions, and interpretations bestowed on similar contexts by their counterparts (Berger and Luckmann, 1967). In this manner, external contacts convey information about the environment and its changing contingencies. At the same time, they shape the frames of reference by which executives understand the external context.

Providing examples of strategic alternatives. Executives reduce the level of uncertainty with which they must contend by turning to external referents for cues on appropriate courses of action. Cyert and March (1963) described the tendency for decision makers to economize on the uncertainty-laden processes of alternative generation and evaluation by turning to outside referents for cues on viable approaches. DiMaggio and Powell (1983) expanded on this premise in their theory of institutional isomorphism, arguing that one explanation for organizational homogeneity is the tendency for managers to look to other firms occupying their environs to learn about policies and practices that appear to deal effectively with critical environmental contingencies. Haveman's (1993) study of savings and loan associations supports these assertions, showing that firms often mimic the actions of larger, more successful organizations.

Apart from helping executives cope with the uncertainty inherent in the choice process, external referents offer models that expand the range of strategic options available for selection. This is particularly important given the barriers to adaptation by executives' cognitive limitations (Child and Smith, 1987). Executives tend to become committed to the organizational status quo, including existing strategies and policies (Hambrick, Geletkanycz, and Fredrickson, 1993), which compromises their ability to recognize the need for and institute adaptational adjustments. Child and Smith (1987) argued that external ties provide a means to compensate for such tendencies, allowing executives firsthand insight into the need for change, as well as approaches other firms have used to negotiate critical contingencies. In many cases, this insight includes concepts and practices that extend beyond executives' limited repertoires. Together, the above themes suggest that boundary spanning interaction will impart a significant informational influence relevant to strategic choice. A second literature suggests that external interaction also conveys formidable social influence.

External Ties: Social Influences on Strategic Choice

Early work on social influences addressed the role external ties play in the absorption of uncertainty associated with critical resource dependencies. Building on Selznick (1949), Thompson (1967), and Zald (1969), studies have demonstrated that firms tend to establish ties -- particularly interlocking directorates -- with sectors that provide or withhold access to critical resources (e.g., Pfeffer, 1972, 1974; Burt, 1980). Perhaps the greatest volume of research in this stream centers on organizations' capital dependencies and linkages with financial institutions, arguing that directorate ties, through cooptation or control, reduce the uncertainty associated with interfirm resource transfers (e.g., Dooley, 1969; Mizruchi and Stearns, 1988). Findings not only show that directorate ties change in concert with shifts in critical external contingencies (e.g., Boeker and Goodstein, 1991) but also that directorate ties facilitate access to the essential resources provided by outside concerns (Stearns and Mizruchi, 1993; Mizruchi and Stearns, 1994).(1)

More germane to our focus or strategic choice, however, is a stream of research arguing that external ties serve as conduits for social influence, promoting the diffusion of views and practices across firms. It builds on observations that social interaction encourages homogeneity (or conformity) in actors' perspectives and behaviors (e.g., Festinger, 1950; Coleman, Katz, and Menzel, 1966; Janis, 1972). Much as the actions and perspectives of social referents are especially salient in uncertain contexts (Cyert and March, 1963), social influences encouraging conformity tend to be strongest when individuals face uncertainty (Festinger, 1954). Conformist influences are spread in the course of the social construction of reality (Berger and Luckmann, 1967), as well as institutional conceptualizations of organization (e.g., Fligstein, 1985), and are reinforced through the use of common language (Pondy, 1977), shared experiences, and professional networks (DiMaggio and Powell, 1983; Galaskiewicz, 1985). In short, social interaction not only helps to shape executives' frames of reference, it brings their views and insights into close alignment with those of their contacts.

Relatedly, research has found that external ties affect the interfirm transfer of a wide range of organizational innovations. Arguing that directorate ties constitute important conduits of social influence, researchers have found evidence that firms will often adopt the same practices, including poison pills (Davis, 1991) and multidivisional structures (Palmer, Jennings, and Zhou, 1993), as those organizations to which they are linked via director networks. Similarly, directorate ties have been shown to play an important role in the spread of corporate acquisitions (Haunschild, 1993; Palmer et al., 1995) and political activity (Mizruchi, 1992). Together, this evidence suggests that through their interaction with outside entities, executives are exposed to social information concerning other firms' policies and practices, which they then often emulate in their own organizations. Accordingly, the external ties of top management teams should have significant effects on their decisions and should be reflected in organizational strategy and performance outcomes.

Executives' External Ties and Strategic Choices

Research in recent years has found that the characteristics of the top management team are highly predictive of a wide array of organizational outcomes and are substantially more predictive than characteristics of the CEO alone (e.g., Bantel and Jackson, 1989; Finkelstein and Hambrick, 1990; Smith et al., 1994). Empirical evidence reveals that executive team attributes are significant determinants not only of organizational strategy, but also of firm-level performance outcomes (e.g., Eisenhardt and Schoonhoven, 1990). Yet none of these studies has considered the role of the executive team's external ties in affecting organizational outcomes.

Concurrent with this void in the strategic literature is a relative inattention in the interorganizational relations literature to the broader set of boundary spanning ties of executive teams and its effects on organizational outcomes. Existing research into external ties focuses almost exclusively on directorship linkages, allowing only narrow insight into the effects of executives' external relations. As Haunschild (1994: 392) noted, "this focus on interlocks ignores the fact that firms have many other types of interorganizational relationships" likely to convey similar informational and social influences. Her study of acquisition premiums demonstrated that, in addition to directorship ties, relationships with outside (investment banking) professionals contributed to the premium decision. With relatively rare exceptions (Galaskiewicz and Wasserman, 1989; Mizruchi, 1992; Palmer, Jennings, and Zhou, 1993), a larger complement of external ties has yet to be examined for its effects on strategy.

A company's strategy can be considered on any number of dimensions, including whether it emphasizes product differentiation or low cost (Porter, 1980), innovation or reliability (Miles and Snow, 1978), innovation timing or focus (Maidique and Patch, 1982), domestic or international activity (Bartlett and Ghoshal, 1989), and so on. Becently, a growing stream of research (e.g., Miller and Chen, 1995; Deephouse, 1996; Henderson, 1996) has suggested that an important way to conceptualize a firm's strategy is according to the extent to which it adheres to or deviates from the central tendencies of the industry, what Finkelstein and Hambrick (1990) called strategic conformity. As noted earlier, executives tend to develop a limited repertoire of strategic alternatives and often become wedded to one particular strategic approach, thus limiting their capacity to envision alternate courses of action. …